RCE Advance Sdn Bhd - 2009

MARC has affirmed the ratings of RCE Advance Sdn Bhd’s (RCEA) RM420.0 million Fixed Rate Medium Term Notes programme (Facility) at A+ for RM240.0 million Class A; A for RM120.0 million Class B; and BBB+ for RM60.0 million Class C notes. The ratings carry a stable outlook. The affirmation and stable outlook are premised on the satisfactory performance of the securities’ underlying portfolio; the maintenance of the minimum covenanted collateral cover ratio of 1.66 times for Class A and Class B notes, supported by an undertaking from RCE Marketing Sdn Bhd (RCEM) to provide the requisite receivables/funds; and strong cash balances in the designated accounts totaling RM87.1 million as of October, 2009. In addition, the transaction benefits from the establishment of a master collection account to mitigate commingling risk and at-source salary deductions administered by Angkatan Koperasi Kebangsaan Malaysia Bhd (Angkasa). The ratings are moderated by the expected slowdown in consumer spending which may dampen receivables growth thus affecting RCEM’s ability to substitute the ineligible receivables.

RCEA, a special purpose company wholly-owned by RCEM, was incorporated for the purpose of periodically purchasing selected portfolios of eligible personal receivables from RCEM. The receivables consist of scheduled repayments (principal plus interest) of loans disbursed to government employees who are members of Koperasi Wawasan Pekerja-Perkerja Berhad (Kowaja) and form the source of repayment for the Facility.  Each transfer of receivables to RCEA involves an absolute legal assignment of all of RCEM’s rights, title and interest in and to the receivables. 

RCEM’s creditworthiness remains a key rating consideration for the rated bonds on account of its ability to originate performing substitute receivables and/or to fund any shortfall in the sinking fund account. As such, Class A and Class B notes are rated two and one notches above the standalone corporate credit rating of RCEM respectively, a reflection of the credit and structural support backing the notes. MARC notes that since issuance, RCEM has provided sufficient receivables/funds to maintain the required minimum collateral cover ratio. The rating of Class C notes is one notch below the rating of RCEM, reflecting the subordination to Class A and Class B notes in respect of coupon payment and principal repayment. The corporate credit rating of RCEM has been maintained at A-. The bonds are also secured by a corporate guarantee from RCE Capital Berhad, RCEM’s ultimate holding company.

RCEM assumes the role of servicer under the transaction, administering and monitoring collections from Angkasa. Funds in Kowaja’s trust account at Angkasa are directly remitted to RCEA’s master collection account, with funds earmarked for coupon payment and principal redemption then transferred to the sinking fund account on a monthly basis. As at September 30, 2009, RM320.0 million in MTNs remain outstanding, backed  by  six  portfolios  of  outstanding  receivables totaling RM318.5 million and RM87.1million cash. During the period under review (October 2008 to September 2009), on average, actual collections exceeded the scheduled collections, primarily due to prepayments. The average monthly delinquency and default rates remained low, ranging from 1.7% - 3.1% and 0.2% - 0.4% respectively. Monthly prepayment rates remained stable ranging from 1.0% to 1.5%.

RCEM is principally involved in the provision of personal loans and consumer financing of electrical home appliances and other consumer durable products to cooperative members. RCEM’s exceptionally wide net interest margin of 14.3% in FY2009 (FY2008: 9.1%)  reflects its low funding cost relative to interest rates charged which is partly attributable to its strong internal capital generation. As a non-deposit taking entity, the company depends heavily on internally generated capital and debt to fund loan growth. RCEM’s retained earnings have grown over the last four years at a compounded annual growth rate of almost 100% per annum. RCEM has also been relying on asset-backed transactions through a securitisation vehicle which has an issuance capacity of RM1.12 billion to fund loan growth. However, increased market aversion towards asset-backed transactions and likelihood of higher funding costs are likely to result in higher reliance in internal capital and alternative financing means for future loan growth.

The company has maintained relatively good asset quality, with gross non-performing loan (NPL) and net NPL ratios standing at 3.5% and 0.8% compared to the industry’s average of 3.9% and 1.6% respectively as of March 2009, partly augmented by its good collection and disbursement system. RCEM currently operates with modest capitalisation.

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